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Trustees To Issue Bonds; Time to 'Reconfigure' University

The Board of Trustees met in Ithaca this weekend, in meetings that were certainly filled with tension and gravitas. Stemming out of the meetings, the University announced the intention to raise further operating capital through the issuance of $500 MM in taxable bonds this spring.

The fact that the bonds are taxable to investors is important, as tax-free bonds tend to have a lot of federal regulations attached to them -- proceeds from taxable bond issues can be used in a much more flexible fashion. As reports the Cornell Chronicle:

"The raising of the $500 million in working capital is really a very intelligent thing to do in a time of financially constrained markets," said board chairman Peter Meinig '61, BME '62. "The fact that Cornell's credit is so good makes it attractive to us to sell those bonds."

This is the first time in recent memory that the university has issued taxable bonds, although it has regularly issued nontaxable bonds to fund construction projects, Meinig said. "Interest rates are relatively low. From an issuer's point of view, I'd say it's a good time to issue bonds."

It will be interesting to see the price associated with these bonds, and other bond issues by similar schools will serve as a good basis of comparison. Princeton floated $1 billion in bonds in January, with ten year notes yielding 4.95 percent, and Harvard floating $1.5 billion in December at 6 percent for its ten year notes. (It should be noted that yields are pegged to the spread above Treasuries, and rates generally fell between December and January, so Princeton can be seen as raising funds that were maybe 60 basis points (0.6 percent) cheaper (aka less risky) than Harvard.)

But both Harvard and Princeton are AAA rated; by contrast, Cornell is a slight notch below at AA1 -- but its debt is still defined as "high grade and high quality". Still, Cornell will likely enjoy lower rates due to the fact that it seeking less funds than Harvard and Princeton. For instance, Vanderbilt recently issued $250 MM in bonds and obtained a price of 5.25 percent -- more in line with Princeton's price than Harvard's -- despite being rated a notch below Cornell at AA2.

Additionally, the Trustees also announced a decision to lower the endowment's yearly dividend, a no-brainer in light of the steep (and ongoing) declines in the market. But I think the real news is yet to come, and is foreshadowed in Sorton's closing paragraph to the community:

But a new reality is at hand for higher education, as well as for the rest of our economy. We are at a defining moment in Cornell's history. It is time to reconfigure the university in ways that not only guard our excellence and breadth, preserve our accessibility, meet our responsibilities to the local community and the State of New York, but that also consolidate our academic and administrative functions in imaginative and cost-effective ways.

Much like the consolidation of Theoretical and Applied Mechanics into the SIbley School, what other departments and academic units can be "reconfigured" across the University? I suspect that future changes coming down the road will not only make financial sense, but will result in stronger educational and research offerings. But more on that later.

Matthew Nagowski | Posted on March 08, 2009 (#)

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